Fraud Must Be Clearly 'Found,' Not Presumed To Invoke Fraudulent Trading Under IBC: NCLT Hyderabad

The Hyderabad Bench of the National Company Law Tribunal (NCLT) has held that proceedings under Section 66 of the Insolvency and Bankruptcy Code, which deals with fraudulent and wrongful trading by directors, cannot be sustained on mere suspicion and require a clear finding of intent to defraud supported by cogent evidence.

A coram of Judicial Member Rajeev Bhardwaj and Technical Member Sanjay Puri passed the ruling while dismissing an application filed by the Resolution Professional of Kobo Biotech Limited seeking directions against the suspended directors to contribute amounts to the assets of the corporate debtor for alleged fraudulent and wrongful trading under Section 66 of the IBC.

The Resolution Professional had alleged that the management undertook write-offs aggregating to Rs 133.48 crore under various heads, including assets, capital work-in-progress, investments, stock, and bad debts, and that the erosion of the company's net worth by Rs 109.40 crore showed that the affairs of the corporate debtor amounted to fraudulent and wrongful trading under Section 66.

Referring to Section 66(1), the tribunal observed that the provision can be invoked only when it is conclusively found that the business of the corporate debtor was carried on with intent to defraud creditors or for a fraudulent purpose.

It said, “A plain reading of Section 66(1) makes it clear that jurisdiction is attracted only if it is found that the business was carried on with intent to defraud creditors or for any fraudulent purpose. The expression “found” is not ornamental; it mandates a definitive and reasoned conclusion based on cogent evidence. Suspicion, inferences, conjectures, discrepancies, doubts, presumptions, or even suggestions, etc., cannot substitute such a finding.”

The tribunal noted that the burden lies on the Resolution Professional to place convincing material on record to establish fraudulent intent, particularly in view of the serious consequences that may follow from an order under Section 66.

Examining the transactions in question, the bench noted that the write-offs largely arose from accounting adjustments relating to non-recoverable receivables, impaired investments, obsolete stock, abandoned projects, and the company's prolonged financial distress. Even if the timing of these write-offs appeared questionable, the tribunal said that by itself would at most raise issues of business prudence or accounting judgment and would not establish fraudulent intent.

No material was placed on record to show diversion of funds, wrongful gain, or any deliberate attempt to prejudice creditor interests. The allegations, the bench observed, were based mainly on accounting entries, timing of write-offs, and inferences drawn from the company's financial position rather than concrete evidence of fraud.

Subsequently, the tribunal found no evidence that the suspended directors continued the business with knowledge that insolvency was inevitable or acted with reckless disregard for creditor interests. As the necessary ingredients under Section 66 of the Insolvency and Bankruptcy Code was not met, the court rejected the RP's plea.